Dollar at one-month high as rate cut expectations ease on Fedspeak

The dollar index hovered at a one-month high against a basket of currencies on Wednesday as remarks by Federal Reserve Governor Christopher Waller dampened expectations for a March rate cut.

Waller said that while the U.S. is “within striking distance” of the Fed’s 2% inflation goal, the central bank should not rush towards cuts in its benchmark interest rate until it is clear lower inflation will be sustained.

“I will need more information in the coming months confirming or (conceivably) challenging the notion that inflation is moving down sustainably toward our inflation goal,” before backing rate cuts, he said on Tuesday.

Market expectations of a rate cut in March have eased to a 62.2% chance versus an 76.9% view in the prior session, according to CME’s FedWatch Tool.

While the market’s latest pricing brings the Fed rate curve into more sensible territory, “with 157 basis points of rate cuts still priced in for 2024, there is room for this to ease back,” said Tony Sycamore, market analyst at IG.

Remarks by European Central Bank, or ECB, President Christine Lagarde later on Wednesday could bring further repricing, he added.

“Rate cuts are coming but not as soon as some might be hoping for,” Sycamore said.

The dollar index, a measure of the greenback against a basket of major currencies, last stood at 103.35 after climbing as high as 103.42 during the previous session, its highest level since Dec. 13. Tuesday also saw the dollar’s biggest one-day percentage gain since Jan. 2.

Meanwhile, the euro was hanging near a one-month low at $1.0875 after its steepest one-day percentage drop in two weeks, following comments from several ECB policymakers this week that maintained uncertainty over the timing of rate cuts.

Sterling was last trading largely unchanged at $1.2636, after a sharp fall on Tuesday in the wake of data that showed British wage growth slowed in the three months through November.

The yen was under some pressure again. The Japanese currency stood at its lowest since early December at 147.45 per dollar, as U.S. bond yields ticked up to support the greenback.

The move in dollar/yen overnight was a “reminder that US Treasury yields remain a big influence on JPY with the (Bank of Japan) likely on the sidelines until at least March (and in our view more likely until mid year),” Rodrigo Catril, senior currency strategist at the National Australia Bank, wrote in a note.

Elsewhere in Asia, eyes are on top-tier Chinese economic indicators for December out later on Wednesday, including fourth-quarter growth which is expected to have slowed to 1% in the October-December period from 1.3%.

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